ACC568 Auditing

Write a report, including a brief executive summary, to your managing partner that addresses the questions below. Where indicated, use the required format to answer that question.

Analyse the ratios and additional information associated with the five accounts listed by your audit partner, John Richards. Identify the potential audit risks and any particular audit steps that need to be undertaken to reduce audit risk. Answer this question using the following headings:
(a) Account (b) Analysis (c) Audit risk (d) Audit steps to reduce risk

Analyse the ratios and additional information to outline business risks that GPSA faces.Identify the internal controls in the system that are potentially effective, the risk that the control could alleviate and one test of control for each of the identified potentially effective controls.
Answer this question using the following headings:
(a) Effective control (b) Risk alleviated (c) Test of control

• Accounts: Accounts receivable is calculated by evaluating credit sales with the average time of receivable.
• Analysis: Based on business case, it can be stated that all the activities associated to receivables are carried out by officials responsible for handling receivable. For example, customer returning medical tools after citing proper reasons of returning, specific notes drawn in favour of buyers and many others (Stewart & Shamdasani, 2014). Thus, high risk is said to be involved in this case.
• Risk of audit: there exists a risk that the trade receivable might perhaps get misappropriated by firm’s official and lower amount of receivable might be registered.
• Different actions connected to receivables trade can be segregated among different members for lessening the audit risk (Reporting et al, 2017).

Investment Account:

-Accounts- Investments can be transformed into cash within a period of 3 months to 12 months

-Evaluation- Investments susceptible to different accounting system is said to be at medium level (Hardy, 2014).

- Audit risk – Fundamentally, inherent risk assessment might be associated to investment carried out without considering diverse risks.

- Audit steps for lessening risk – The return acquired on specific investments can be assessed at regular intervals (Hay et al., 2016).

Property Resources:

- Accounts: Accounts related to property resources are necessarily related to fixed asset accounts along with amount of depreciation

-Evaluation: Improper registration of resources and inappropriate presentation of depreciation can pose high level of risk (Bik et al., 2017).

-Audit Risk: Auditor might not distinguish resources used for period more than 180 days and for period lower than 180 days in a specific year in case if resources are not registered suitably (Hay et al., 2016)

-Audit Steps for decreasing risk- ledger for asset, examination of purchase and sales of property resources can be examined.

Intangible Assets

Accounts: Accounts associated to intangible assets are goodwill, copyrights and patents.

Evaluation: Intangible asset need to be evaluated correctly in a bid to assess the value and mode of recognition

Audit Risk: Intangible assets necessarily have no physical subsistence and the procedure of determination of intangible asset’s fair value can be regarded to be difficult (Moroney et al., 2014).

Steps for reducing risk: Fair value of different intangible assets can be determined by proficient experts. Attainment of control over the procedure of determination of fair value of assets aids in diminution of risk.

Research and development of corporation

Accounts: As the research exercises of especially GPSA was not promising, expenditure on the same can be necessarily be capitalized as the development was un-flattened.

Evaluation: There lies a very thin line between successful and unsuccessful research and development. Because the disbursements on research and development are comparatively high, inappropriate recognition lead to high level of risk (Carey et al., 2013).

Audit of Risk: The inherent risk associated to expenditure on research as well as development is the categorization of research work as either successful or unsuccessful

Steps of audit for risk diminution: Specific ledger that can be connected to expenditure need to be assessed appropriately. Additionally, proper market research can be carried out before establishment of product (Houghton & Campbell, 2013).

Analysis of key financial ratio for evaluation of risk associated to business

Return on Equity (ROE):

Analysis of financial assertions reflects that the return on equity is seen to have a downward trend. ROE decreased 22.7% in 2015 to 7.19% in 2017. This reflects decreased potential of the firm to generate profits from investments and risk on profitability on shareholder’s equity.

Return on Assets (ROA):

Analysis of return gained on assets of the business concern is observed to have a downward trend. In essence, this has necessarily decreased from 15.52% in 2015 to 4.86% in 2017. This implies that the capability of the business concern to acquire gains against available resources is diminishing (Stewart  & Shamdasani, 2014).

Profit margin:

Analysis of profit margin (net) of the corporation shows a decreasing trend. Essentially, the same has decreased from 15.52 in 2015 to 4.86% in 2017. In essence, this reflects that the earnings both before tax and interest with potential of business concern measured against resources is decreasing (Reporting et al., 2017). Therefore, there is said to be profitability risk of the corporation.

Time earned interest:

Analysis of report reveals that the time for which corporation’s interest earned during a particular period declined to 1.90 in comparison to previous year’s figure of 3.51 in 2016 and 4.10 times recorded in 2015. Thus, there subsists a risk of saving as the corporation is not able to save adequate amount to generate interest income (Hardy, 2014).

Analysis number of days in receivables- 

The number of days in receivables has increased from 53.24 days to nearly 83.07 over the last two years in the two years (2015 and 2017). Thus, there subsists a risk of bad debt from particularly the receivables.

Analysis of current ratio:

Although current ratio of the firm is observed to have a rising trend, the ratio of the corporation is enumerated to be 1.80 during the year 2016. Essentially, this reflects the risks of not using working capital efficiently by the management of the corporation (Hay et al., 2016).

Analysis of debt equity ratio:

A superior debt equity ratio (that is higher than 1) replicates that the corporation is highly leveraged. Effectively, this shows that the firm has also gained more funds by means of debt financing in comparison to equities (Bik et al., 2017).

Process of internal control

1. a) Efficient control

Pay-out of bonus: Bonuses disbursed to administrative officials can be evaluated by the shareholders of the firm. In case if there is variance with the firm’s budget designed on monthly basis, the individual in charge can be asked to illustrate the reason behind the variation

Fortification of password: the implementation program was appropriately fortified with passwords limited free admission (Hay et al., 2016).

Allowed Concession-Concessions permitted to different customers are validated by specifically the director of sales before upgrading allowable discounts to different customers.

Receivable from trade: Receivables are fused with power of debtors during the closing of each month

Aging Analysis: Aging analysis for receivables from trade are usually presented utilizing the computers at the end of every month, taking into consideration all sales invoices that can essentially be processed into the particular system (Moroney et al., 2014). This is carried out by controllers of finance. In particular, trade receivables for more than 890 days are essentially segregated and for this the official responsible for handling receivable is asked to mention the main cause behind delay in payment.

Doubtful Debt: While preparing follow up strategy for doubtful debtors when balance is over and above the prescribed limit, the shipment of additional products to particular customers is necessarily put on hold in case if minimum amount of agreed limit is not acknowledged (Carey et al., 2013).

1. b) Mitigation of Risk

Accessibility to the database:

Even if strict password is applied for controlling the accessibility on particular programs related to IT operations, admittance to company’s database is not fortified by password that subsequently can expose the entire system to risk of illicit admittance (Houghton & Campbell, 2013).

Delivery Notes:

Fundamentally, shipping tiles to specific customers directs the way towards generation of particular manuals notes. Essentially, this has escalated to new heights in the recent years. This necessarily leads to both intended or else unintended faults related to delivery (Carey et al., 2013).

Engagement of a single person for diverse activities:

Various business actions associated to receivables from trade can be carried out by the receivable official of the corporation. Say for example, returns of diverse customers on specific medical instruments acquired after determination of reason of getting return, credit note drawn in favour of consumers can be properly raised by the official responsibly for handling receivable (Houghton & Campbell, 2013).

1. c) Test of control

Test of control can be regarded as procedure of assessment that can be utilized for assessment of effectiveness of internal control process used by the client corporation. Essentially, tests of control can be categorized as follows:

-New Transaction- Under this specific system, a novel transaction is introduced to assess the system of internal control (Houghton & Campbell, 2013).

-Inspection- Under this particular arrangement, the associated documents are evaluated to assess the system of internal control

-Examination- Under this specific system, the associated documents are evaluated utilizing stamps, signatures as well as other modes of signatures for analysing control (Moroney et al., 2014)

-Observation-Under this particular system, the business procedures under consideration along with the associated internal system of control are examined thoroughly.

Effective Control that can be used for test of control is necessarily presented below:

-Disbursement of bonus – Observation strategy of control test can be performed for this reason (Moroney et al., 2014)

-Password Fortification – Inspection strategy of control test can be performed for this reason

-Allowance of discount – Re-performance strategy of control can be performed for this reason

-Receivables derivable from trade – Re-performance strategy of control test can be performed for this reason (Moroney et al., 2014)

-Aging Analysis- Both observation along with inspection strategy of control test can be performed for this reason

-Doubtful debt- Re-performance strategy of control test can be performed for this reason (Hay et al., 2016).

Identified weaknesses in internal control for specifically sales and receivables of trade

Sales:

-The business concern expends bonuses to the management officials based on the volume of sales. Nevertheless, there are possibilities that volume of sales might enhance misleadingly.

- The company delivers manual delivery notes for tile sales that are exposed to diverse faults, scam or else material misstatement.

-Sales journal are also prepared and presented on monthly basis, nevertheless, there remains possibilities of misplacement of diverse manual documents (Houghton & Campbell, 2013). 

Receivables from trade:

-The officer in charge of receivables is also held responsible for actions that subsequently might lead to intended else wise unintended actions of fraud, faults or else material misstatement.

-Receivables from trade are also merged with bank receipts at the conclusion of each month that is fairly good time for settlement of major things for example, receivables (Houghton & Campbell, 2013).  

References 

Bik, O., Hooghiemstra, R., Bishop, C. C., DeZoort, F. T., Hermanson, D. R., Officers’Judgments, F., ... & Glover, S. M. (2017). Auditing: A Journal of Practice & Theory A Publication of the Auditing Section of the American Accounting Association.

Carey, P., Knechel, W. R., & Tanewski, G. (2013). Costs and Benefits of Mandatory Auditing of For?profit Private and Not?for?profit Companies in Australia. Australian Accounting Review, 23(1), 43-53.

Hardy, C. A. (2014). The messy matters of continuous assurance: Findings from exploratory research in Australia. Journal of Information Systems, 28(2), 357-377.

Hay, D., Stewart, J., & Botica Redmayne, N. (2016). The Role of Auditing in Corporate Governance in Australia and New Zealand: A Research Synthesis.

Houghton, K., & Campbell, T. (2013). Ethics and auditing (p. 354). ANU Press.

Moroney, R., Campbell, F., Hamilton, J., & Warren, V. (2014). Auditing: A Practical Approach. Wiley Global Education.

Reporting, D. W., Berger, L., Perreault, S., Wainberg, J., Courtois, C., Gendron, Y., ... & Li, C. (2017). Auditing: A Journal of Practice & Theory A Publication of the Auditing Section of the American Accounting Association.

Stewart, D. W., & Shamdasani, P. N. (2014). Focus groups: Theory and practice (Vol. 20). Sage publications.